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Curing defaults in student loans

If you went to school beyond high school, chances are student loans went with you. Whether they were federally backed loans or private loans, an effective strategy to repay these student loans is essential for your financial and mental health. If you feel like you hit a patch of quicksand along your journey, you are not alone. While federally backed student loans are currently “paused” through August 31, 2022, if you begin to develop a strategy to repay your loans now, you will be much better off.

Private loans (such as Sofi, Discover, etc.) are governed by the contract you signed when you took the loan(s). Check the contract to determine if you have any options. If you are considering a refinance of your federally backed loans through a private lender, read this blog first to determine your options with your current student loans.

The relief provided under the COVID-19 emergency provisions gave borrowers three forms of relief. While you may have heard rumors that student loans will be forgiven to some extent, do not count your chickens before they hatch. While you still have the breathing room, develop a strategy that suits your current and future situations.

If your student loan is currently in default, you need to take action to cure it. The Department of Education defines default as not having made a payment in excess of 270 days (9 months). At that point, you are no longer eligible for an income-driven repayment plan or other workouts. There are three ways to get out of default: 1) Pay the entire balance due; 2) loan rehabilitation; and 3) consolidation. Since paying the balance is often not an option, let’s discuss the other two.

Loan rehabilitation involves an agreement with your loan servicer to make 9 consecutive monthly payments based upon your income and family size. If you successfully make all these payments in a timely fashion, the default is cured, all collection actions (including wage attachments and income tax refund setoffs) cease and you can take advantage of other programs we will discuss later. Beware though that if you default on the loan rehabilitation or any subsequent defaults take place, you are not eligible for any subsequent loan rehabilitations.

Consolidation takes place when all your outstanding loans are consolidated into one loan for servicing. You must make 3 consecutive payments on the defaulted loan before you can consolidate it. Consolidation will remove the default status from your loan. Once consolidated, you will once again be eligible for the other programs.

You, of course, could file for bankruptcy and try to have your loans discharged. Try as you may, this procedure is quite difficult. You would be much better off trying to work out your student loan situation, especially since these efforts are considered when trying to discharge a student loan. To that end, the next blogs will explore deferment and forbearance options as well as income-driven repayment programs available for your student loans. While many of these options are available for individuals to navigate with their servicer without outside assistance, the procedures can be complicated. If you find you need help, contact us. We seek to provide second chances here on Second Street.

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